US Inflation Data to Test Bond Market Rally as Fed Keeps Rates High

The article focuses on the upcoming April consumer price index (CPI) release on May 15, which will significantly impact the US bond market and influence the Federal Reserve's monetary policy decisions on interest rates. The CPI report will provide insight into the Fed's progress in combating inflation, with economists expecting a slight decrease in core CPI rate, and its outcome will have far-reaching implications for global markets and interest rates. This description highlights the primary topic (CPI release), main entities (Federal Reserve, bond market), context (global markets and interest rates), and significant actions/consequences (impact on monetary policy decisions and global markets). The objective details provided will help guide the AI in creating an accurate visual representation of the article's content.

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Aqsa Younas Rana
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US Inflation Data to Test Bond Market Rally as Fed Keeps Rates High

US Inflation Data to Test Bond Market Rally as Fed Keeps Rates High

The US bond market's direction hinges on the crucial April consumer price index (CPI) release on May 15, which will test whether the recent rally can be sustained or will falter. The data will provide insight into the Federal Reserve's progress in combating inflation, a key factor influencing monetary policy decisions.

Recent CPI reports have fueled bond market selloffs due to faster-than-expected inflation readings, raising concerns about the Fed's ability to tame rising prices. The last CPI report on April 10 sent 10-year Treasury yields surging 18 basis points, the biggest one-day move caused by CPI data since 2002. As a result, the market is currently in a "holding pattern" until the upcoming release, according to Bank of America Corp. strategists.

Why this matters: The outcome of the April CPI report will have far-reaching implications for global markets, as it will influence the Federal Reserve's monetary policy decisions and impact the direction of interest rates worldwide. A surprise in the inflation data could lead to significant market volatility, affecting investors and consumers alike.

Jonathan Cohn, head of US rates desk strategy at Nomura Securities International, emphasized the market's focus on rate releases, stating, "The reality of the market right now is where we lurch from data release to data release." He added that for the rally to be sustained, the CPI data must show that disinflation is coming through and inflation is not re-accelerating, despite signs of economic softening.

Economists expect the core CPI rate to rise by 0.3% in April from the previous month, a slight decrease from the 0.4% increase in March. The overall CPI index is projected to rise by 3.4% year-over-year, down from the 3.5% increase in March. In response to the anticipated us, 10-year Treasury yields have declined nearly 20 basis points to around 4.5% this month, with US Treasuries gaining about 1.3% through May 9, partially offsetting the 2.3% loss in April.

The Fed has been working to combat inflation, with Governor Michelle Bowman recently emphasizing that policy bids may need to remain high for an extended period. While the labor market has shown signs of cooling, leading to expectations of potential monetary policy easing later this year, Deutsche Bank AG's chief US economist, Matthew Luzzetti, does not anticipate a first Fed cut until December. However, he notes that investors' sentiment is prone to react in a dovish direction given the current momentum.

As global central banks diverge on interest rate policies, with the European Central Bank cutting rates while the Fed maintains high borrowing costs, the upcoming US inflation data will be a critical determinant of the bond market's trajectory. The April CPI report will test the resilience of the recent rally and provide valuable insights into the Fed's progress in taming inflation, ultimately shaping the future path of monetary policy and the bond market's direction.

Key Takeaways

  • April's CPI report on May 15 will impact the US bond market's direction and Fed's monetary policy decisions.
  • A surprise in inflation data could lead to significant market volatility.
  • Economists expect core CPI to rise 0.3% in April, with overall CPI up 3.4% year-over-year.
  • Fed may need to keep policy rates high for an extended period to combat inflation.
  • April CPI report will test the bond market's rally and influence global interest rates.